Like possibly quite a few other value pickers over the past few weeks, I got enticed by the JPMorgan Chase (JPM) story and bought on the dip. However, I have recently disposed of my shares and took the roughly 10% loss when I realized that my investment thesis was all wrong.
Most people would have to admit that when they buy bank stocks, they buy the story and the supposed management quality. After all, there are very few people inside the banks themselves that can truly comprehend what the banks have on their books and how it all comes together, let alone outside investors.
So it's not all that surprising that a lot of people who hold JPM stock are long only because they got sold on the idea of the company having a brilliant management team and a star CEO, a guy praised by Warren Buffett, President Obama and practically everybody. However, as I started gathering more information and properly educating myself on the subject, several alarming things came up that made me do a complete 180-degree turn of opinion and sell the shares.
Tempest In A Teapot
The Wall Street Journal reports that on April 30, Jamie Dimon supposedly "couldn't breathe" when he was shown the bank's positions. Yet when news of JPM's losses broke, the first public comment from Dimon on the subject called the issue a "tempest in a teapot." For a guy who is supposed to be very direct, straightforward and honest, that is rather low.
The Firing Of Ina Drew
It's not really the fact that CIO Ina Drew was let go/resigned, it's the way the affair has been handled. It's perfectly understandable that heads roll when a mishap of this magnitude occurs; however, what's not understandable is this: When her resignation became public, Dimon reportedly (as per the WSJ article referenced above) walked with her to the trading floor to tell everyone and even gave her a big hug.
Now, I don't think this is how prudent management is supposed to behave. If the resignation/firing (however you want to look at it) was for real cause, then you most definitely don't parade the person around the office and give her hugs. A situation where such behavior would be understandable is when the person is the official scapegoat. Prudent management does not pick scapegoats.
Stock Buybacks Cancelled
Many value investors pondering putting their money into JPM and evaluating the potential downside have no doubt considered the dividend yield of the stock and the on-going stock buyback program. JPM had $15 billion reserved for stock buybacks, of which $12 billion were meant to be used this year. And what a fantastic time for share buybacks when the stock price dives close to or below the tangible book value!
Unfortunately, on May 21, JPM announced that it's halting the buybacks. According to Dimon, the bank decided to suspend share repurchases in order to meet global regulatory requirements on higher capital levels and not because of the size of trading losses. I am not buying this explanation at all.
For a very long time, JPM shareholders have been told that the bank is well on track to meet the regulatory requirements for capital levels. And Dimon is very well-known as someone who understands when buying back stock makes sense from a value viewpoint and when it doesn't.
So what's changed? I think that there is either a very real possibility of the trading losses growing far beyond current market expectations or, alternatively, there are some big new holes that have been very recently uncovered that aren't yet public knowledge.
JPMorgan might very well be seriously undervalued at current levels and holders of its stock could end up realizing very good returns in the future. However, I believe that with the "brilliant management" story having melted right before my eyes, buying JPM stock with so many uncertainties at this point would be speculation and not prudent investing.